What is a business market? In its most basic form, a business market is anetwork of transactions and relationshipsamong buyers and sellers.

Questions to consider when designing a market 1.Which activities should we perform ourselves and which should we source from the outside? 2.How should we relate to outside parties, including customers, suppliers, distributors, partners, and others?

Which activities should we perform ourselves and which should we source from others? OptionsDescription Vertical Integration Locate all but the most routine, transaction- oriented activities inside the firm. Selective Sourcing Source selected activities from the outside. Traditionally, sourced activities were controlled through short term contracts. Virtual Integration Become part of a network of highly specialized, independent parties that work together to perform, coordinate, and control value chain activities.

How should we relate to outside parties? TransactionContract Partnership Basis of Interaction Discrete exchange of goods, services, and payments; e.g., simple buyer/seller exchange Duration of Interaction ImmediateLevel of Business Integration Low Coordination and Control Supply and demand (market) Information Flow Primarily one way; Limited in scope and amount; Low level of customization Prior agreement governs exchange; e.g., service contract, lease, purchase agreement Usually short-term and defined by the contract Low to ModerateTerms of contract define procedures, monitoring, and reporting One or two way; Scope & amount are usually defined in the contract Shared goals and processes for achieving them; e.g., collaborative product development Usually long term and defined by the relationship HighInter-organizational structures, processes, and systems; Mutual adjustment Two-way (interactive); Extensive exchange of rich, detailed information; Dynamically changing; Customizable

Relationships TransactionsContractsPartnerships Structure Virtual Integration Selective Sourcing Vertical Integration A framework for analyzing market structure and relationships

How will markets organize in the Network Economy?

Emerging networked market models

Components of a Business Model

Components of a Business Model (continued)  Brand and reputation  Financial performance  Deliver value to allstakeholders?  Claim value from stakeholder relationships and transactions?  Increase market share and drive new revenues off existing customers?  Increase brand value and reputation?  Generate confidence and trust?  Ensure strong growth in earnings?  Generate positive equity cash flow?  Increase stock price and market value?

Stocks are traded on a physical trading floor using the open-outcry auction method. Until recently, investors placed orders through stockbrokers who then communicate those orders to floor brokers who completed the trades at the booth of a specialist. In 2000, 30% of orders were transmitted electronically directly to the specialist at his/her booth on the physical trading floor. Specialists are members of the NYSE who act as auctioneers for their assigned stocks. Each stock is assigned to one specialist. New York Stock Exchange market model in 12/2000 Screen-based trading enables complete view of orders High levels of transparency within global markets Limited sources of capital Floor-based trading of over 3025 securities Specialists maintain a central order book–order-driven system Average daily trading volume was 1.0 billion shares per day and the # of listings was 2,862 Average market value was $US 12.4 trillion - Specialist Acts as Agent BUYSELL Auction Market Model

Unlike the NYSE where trading was driven by the flow of orders received by specialists, trading on the NASDAQ was driven by quotes from multiple market makers that commit their own capital to establish a buy and sell position in each stock that they wish to trade. The position reflects the price they would be willing to buy (bid) and sell (offer) a stock. The pricing window between the best bid and offer is called the “inside spread.” NasdaqSecurities Exchange market model in 12/2000 Screen-based trading enables complete view of orders High levels of transparency within global markets Limited sources of capital Screen-based trading of over 4734 securities Computer displays buy and sell quotes from multiple market makers–quote-driven system In 2000, the Nasdaq market united over 500 market making firms On average, each stock was traded by 10 different market makers, which encouraged competition among market makers driving prices down Average daily trading volume was 1.8 billion shares per day and the # of listings was 4,734 Average market value was $US 3.6 trillion Multiple Market Makers act as Principals Market Maker Model BUYSELL

ECN market model in 12/2000 Screen-based trading enables complete view of orders High levels of transparency within global markets Limited sources of capital Screen-based automated trading Computer acts as a specialist attempting to match orders from individuals and market makers– order-driven system In 2001, the oldest and largest ECN, Instinet, had over 21,000 subscribers and accounted for over 12% ofNasdaq daily volume Unlike exchanges,ECNswere not required to divulge the identity of individuals and firms trading on its network and could charge a subscription fee of its members In 2001,ECNscharged $2-$5 per trade vs$50-$60 per trade by a human broker Computer System acts as Agent Automated Trading Market Model BUY SELL Like the NYSE, Electronic Communication Network (ECN) trading was driven by the continuous flow of buy and sell orders, rather than by the competitive quote-driven trading as seen on the Nasdaq. But, unlike the NYSE, orders traded without the human intervention of a specialist. When a buyer or seller submitted an order to an ECN, the computer first attempted to match the order within the ECN market; in 2001 ECNs were able to match about 50% of their orders internally. If the order did not match within seconds, the ECN assumed the role of a Nasdaq market maker and the order was submitted to Nasdaq. In 2Q2001, ECNs accounted for 29% of Nasdaq market volume, up from less than 3% in 2Q 1998.

Until the late 1990s, stocks were traded on a physical floor using open outcry auction. The “itoyose” process was used to set opening price, and the “zaraba” process was used to price continuous order flow. “Saitori” (“nakadashi” at OSE) execute trades but, unlike NYSE specialists, there was no obligation to correct imbalances. With full automation, the Japanese markets have been likened to the ECN with mandated order flow. Screen-based trading enables complete view of orders High levels of transparency within global markets Limited sources of capital ECN Market Specialist Automated System Acts as Agent BUY SELL Screen-based trading of over 1400 securities (TSE) and over 1200 (OSE) Automated central order book (limit and market orders) OSE turnover is 9% vs. 18% on TSE, 88% on NYSE, and over 100% onNasdaq In 2001, OSE had 88 domestic and 20 foreign broker/dealer members Auction Market Model Automated system acts as an agent BUY SELL The TSE/OSE market model (mandated order flow)

Nasdaq Japan Nasdaq Japan Issuer Size & Maturity TSE and OSE Section 1 TSE and OSE Section 1 Jasdaq OTC Jasdaq OTC TSE Mothers TSE Mothers Slow years Fast 3-5 years Small/ Young Large/ Established TSE and OSE Section 2 TSE and OSE Section 2 Nasdaq Japan Nasdaq Japan Issuer Size & Maturity Average Time to Public Offering TSE and OSE Section 1 TSE and OSE Section 1 Jasdaq OTC Jasdaq OTC TSE Mothers TSE Mothers Slow years Fast 3-5 years Small/ Young Large/ Established TSE and OSE Section 2 TSE and OSE Section 2 Comparison of Japanese securities markets TSE accounts for 70% of shares listed, 80% of trading value, and90% of trading volume

NasdaqJapan market entry strategy June 19, 2000 Phase 1 Enter Quickly Using OSE Market Platform Early 2002 Phase 2 Launch Hybrid Market Model ??? Phase 3 Link Global Pools of Liquidity

TheNasdaqJapan market model Business Concept: Market Opportunity Product and service offered Competitive Dynamics Strategy for capturing dominant position Strategic options for evolving the business

TheNasdaqJapan market model GDP9.2T4.5T48.9% Trade Vol1994M711.9M35.7% Turnover78%(NYSE)44%(TSE)56% # of Listings % # of IPOs % Market Value17.64T7.338T41.6% Avg Price/Share43.77(NYSE)6.79(TSE)14.8% USA JAPANRatio Market Opportunity? 1999

Competitive Dynamics

NasdaqJapan financing history Softbank Nasdaq Japan, Inc. Nasdaq U.S. Strategic Investors (¥500 million each)Limited Partners October 2000 ¥800 millionOctober 2000 ¥5 billion June 2001 ¥ million Burn Rate: : ¥1.9 billion 2002: ¥24 million 2003: ¥12 million Softbank Nasdaq Japan, Inc. Nasdaq U.S. Strategic Investors (¥500 million each)Limited Partners October 2000 ¥800 millionOctober 2000 ¥5 billion June 1999 ¥ 300 million Burn Rate: : ¥1.9 billion 2002: ¥24 million 2003: ¥12 million Dec ¥ million Post-Money % Ownership Nasdaq U.S.42.9% Softbank42.9% Strategic Investors Limited Partners Post-Money % Ownership Nasdaq U.S.42.9% Softbank42.9% Strategic Investors Limited Partners 13.8% 0.4% December 2001 Softbank Nasdaq Japan, Inc. Nasdaq U.S. Strategic Investors (¥500 million each)Limited Partners October 2000 ¥800 millionOctober 2000 ¥5 billion June 2001 ¥ million Burn Rate: : ¥1.9 billion 2002: ¥24 million 2003: ¥12 million Softbank Nasdaq Japan, Inc. Nasdaq U.S. Strategic Investors (¥500 million each)Limited Partners October 2000 ¥800 millionOctober 2000 ¥5 billion June 1999 ¥ 300 million Burn Rate: : ¥1.9 billion 2002: ¥24 million 2003: ¥12 million Dec ¥ million Post-Money % Ownership Nasdaq U.S.42.9% Softbank42.9% Strategic Investors Limited Partners Post-Money % Ownership Nasdaq U.S.42.9% Softbank42.9% Strategic Investors Limited Partners 13.8% 0.4% December 2001

NasdaqJapan Key Challenges Nasdaq Japan is quickly running out of cash.. Failure to attract high liquidity stocks from Nasdaq US Competing interest of powerful stakeholders: widely divergent and complex cultural norms has impacted ability to launch and grow company